IRS asks airlines to provide tax refunds, carriers want IRS to do it

Passengers who bought plane tickets before Saturday for trips beginning Saturday or later might be due an airline-tax refund as a result of the partial shutdown of the Federal Aviation Administration.

Getting that refund might not be easy.

In guidance posted on its Web site Tuesday night, The Internal Revenue Service asks airlines to provide the refunds, since they collected the tax and have passenger records and refund procedures in place. If airlines won’t provide the refunds, consumers will have to get them from the IRS under a process that is still being worked out.

Although the airlines were quick to profit from the FAA shutdown, their main trade group says the IRS — not the carriers — should provide the refunds since the tax money has already been forwarded to the government.

“We are a bit puzzled by the IRS guidance because we believe it is the responsibility of the IRS and they are better suited to provide refunds,” says Steve Lott, a spokesman for the Air Transport Association.

The brouhaha started Friday, when Congress failed to approve a bill to keep the FAA operating amid a partisan dispute over rural-airport subsidies and union organizing. The partial shutdown of the FAA furloughed more than 4,000 employees, halted airport construction projects and prohibited the government from collecting certain airline taxes starting Saturday.

These taxes add up to roughly $30 on a standard $300 domestic round-trip ticket. Airlines collect them from passengers and send them to the government.

Airlines stopped collecting the taxes as of 12:01 a.m. Saturday. Although fares initially dropped by the amount of the tax, by Monday most U.S. carriers had jacked up their prices by roughly the same amount, pocketing a windfall. The only holdouts are Alaska Airlines and Spirit Airlines.

Customers who bought tickets and paid the tax before Saturday for a trip that starts while the tax holiday is in effect are due a refund.

Most airlines had been directing customers seeking refunds the IRS, which had no information beyond a brief statement until Tuesday night. In its new guidance, the IRS says:

“Airlines are permitted to refund the tax to the passenger, just as they do in the ordinary course of business when issuing refunds for unused refundable tickets (including the associated taxes). Because the airlines and travel service providers already have the information about passenger ticket purchases and travel, and in many cases have payment card information that may facilitate streamlined refunds, the IRS has asked the airlines to provide refunds to eligible passengers when requested. However, passengers who are unable to obtain a refund from the airline may obtain a refund by submitting a claim to the IRS.” It adds that travelers will have to submit proof of taxes paid and travel dates to the IRS under procedures that are under development.

What happens if a passenger buys a ticket now while the tax is suspended for a trip that begins after the tax has been reinstated?

The IRS says, “That depends on how such travel is treated in any legislation reinstating the tax. The legislation could either impose tax on all travel occurring after its enactment or provide an exemption for passengers who purchased tickets during the period when the tax was not in effect.”

Before today, most airlines had been directing customers seeking refunds to the IRS.

One exception is JetBlue, which has been telling customers traveling this week how to request a refund. For details see here.

Lott says each airline will have to whether to provide refunds in light of the recent IRS guidance.

United Airlines will not provide refunds, spokesman Mike Trevino says. “We are referring customers seeking refunds to the IRS.”

American Airlines spokesman Tim Smith says, “All I can (say) at this moment is that we are reviewing our next steps.”

At Delta Air Lines, “We are directing customers to the IRS to get more information on the tax refund issue,” spokesman Trebor Banstetter says.

Paul McElroy, a spokesman for Alaska Airlines, says, “The IRS just released these guidelines, we will need to evaluate how best to proceed.”

The taxes that have been suspended include the 7.5 percent tax on the base ticket price; the domestic segment tax of $3.70 per segment (a single takeoff and single landing); the international travel facilities tax of $16.30 per person for flights that begin or end in the United States or $8.20 per person for a flight that begins or ends in Alaska or Hawaii.

Most airlines do not collect these taxes from passengers using frequent flyer miles to get a free domestic ticket, says Gary Leff, co-founder of milepoint.com.

The tax holiday does not apply to other charges including the Sept. 11 security fee, passenger facility charges, and immigration, customs and USDA fees on international trips. Airlines are still collecting these taxes. They will not be refunded.